The bonds of topstone industries are currently selling for 103.3 percent of their face value. these bonds mature in 14 years and pay an annual coupon of 7 percent of face value. what is topstone's pre-tax cost of debt? a) 6.63 percentb) 7.35 percentc) 7.84 percentd) 8.60 percente) 9.45 percent

A.) 6.63%

Explanation:

Using a Financial calculator, key in the following inputs to solve for YTM;

Face value of the bond ; FV = 1,000

Price of the bond; PV= 103.3% *1,000 = -1,033

Total duration or time to maturity of the bond; N = 14 years

Use annual coupon rate to find Coupon payment (PMT);

Coupon PMT = coupon rate * Face value

coupon rate = 7% OR 0.07 as a decimal

Coupon PMT = 0.07 *1,000 = 70

Next, with these inputs, press on buttons; CPT I/Y = 6.631%

Therefore, the Pre-tax cost of debt = 6.63%